Daily Forex Fundamental Overview

Fundamental Analysis

EUR

"All this talk about QE has gotten markets rather excited. I am sure the ECB -– like most of us -– is happy about this, but action is not imminent.”

-Erik Nielsen, UniCredit

Last week Mario Draghi took no decisive action, neither to lower the main refinancing rate nor launch ECB’s own U.S.-style quantitative easing programme. However, he made it clear that soon the ECB will follow the Federal Reserve and the Bank of England by firing up his virtual money printing press and injecting hundreds of billions of euros into the struggling economy.

This week Mario Draghi flies to the United States, leaving a huge, trillion-euro question mark hanging over the 18-nation bloc. ECB’s President will be under scrutiny by the IMF to present a full plan of introducing the stimulus programme, and according to economists from UniCredit and Deutsche Bank, investors are preparing for a disappointment. Some officials claim that the ECB will try to lean forward its credit-enhancing programme that has been recently tested by buying around 80 billion euros per month over one year. It helped to boost the inflation by as much as 0.8%. At the same time, time buying government bonds can be legally and politically difficult, as Draghi will have to choose which countries’ bonds to acquire, while central bank’s founding treaty forbids it from providing financial support to governments. Nevertheless, last week’s comments made everyone really excited, while EUR/USD finished the week at a five-week low, providing a short-term weakness for the single currency.

USD

“Possible gains are small, and it would be hard to get the world's policymakers to play the cooperative (approach)"

- James Bullard, St. Louis Federal Reserve Bank President

Federal Reserve Bank of St. Louis President James Bullard expressed his concerns on Monday about low inflation in the U.S., but indicated that easy-money policies of the central bank have been effective to prop up growth in the world’s number one economy. He also said that the global economy would benefit to a little extent if major central banks coordinated monetary policy. The scheme, which was introduced by the Fed to combat recession and spur economic growth, has sparked some concerns especially among central banks in the developing economies, where policymakers worry that Fed’s unprecedented stimulus programme is destabilizing financial markets. However, the reaction of markets to Fed’s decision to start winding down its stimulus measures has been modest thus far.

Meanwhile, the Federal Reserve figures showed that consumer borrowing in the U.S. rose more than expected in February amid surging demand for student and automobile loans. Total consumer credit soared $16.49 billion to $3.13 trillion, while January's reading was revised to show a $13.80 billion advance compared to the previously reported $13.70 billion gain. Improving labour market, increasing home values and stock portfolios contribute to healthier balance sheets and bolster confidence. Growth in income and improved credit scores provide consumers with wherewithal to take out loans for big ticket purchases, thus helping sustain spending.

GBP

“It is a stone dead certainty that the BoE MPC's April meeting will see unchanged monetary policy”

- Howard Archer, chief UK economist at IHS Economics

On Monday the cable was almost unchanged in quiet session and a lack of fundamental data from the U.K. Although, Yellen’s last week’s comments and hints about the upcoming rate hike can become a strong, long-term driver for the U.S. Dollar, and the cable in particular, this week the Sterling will remain in focus almost every data, as Mark Carney will take the stage on Thursday.

Even though policymakers are projected to stay pat on the monetary policy, a hike to 0.75% will result in a strong bullish spike. With this unlikely to happen, a strong trend change for the Sterling can be expected in the foreseeable future. The central bank has kept its benchmark interest rate at 0.5% since March 2009, while MPC members were unanimous in their decision. This sentiment is expected to be echoed again this week. While Carney made it clear, the central bank will not rush raising borrowing costs, the latest inflation report supports the case for a period of prolonged stimulus measures.

Carney has begun implementing reforms in the three-century-old institution since the appointment last year. He pledged to reform the banking sector as well as oversees changes to the management to avoid further scandals or issues wit the banking sector. At the same time, he should adjust his forward guidance, or, otherwise, he will fail in convincing investors once again.

JPY

“Kuroda doesn’t need to move as drastically as in April last year, when he was shifting the economy from deflation. By doubling the ETF buys, the BOJ can send a message that it’s there to take action when the economy weakens.”

- Yoshimasa Maruyama, chief economist at Itochu Corp.

Japanese central bank, which is projected to keep the pace of annual stimulus injections at 60-70 trillion yen in order to double the monetary base and weaken the Yen, is likely to announce another bold measure soon. According to a poll conducted by Bloomberg, the Bank of Japan will double its annual purchases of exchange-traded funds to 2 trillion yen in months ahead. At the same time, the expansion of annual bond purchases by at least 10 trillion yen can be made in July, as analysts consider this month a perfect timing. Despite being confident in reaching a 2% inflation within the two years, rising inflation expectations can restrain more ambitious plans like an open-ended ETF purchases, even despite obvious signs of economic slowdown. Shinzo Abe’s Abenomics helped to weaken the Yen by 5.5% versus the Dollar last year, fuelling inflation even despite the fact the government bond yields remain at the lowest level in the world, with rates at 10-year at 0.64%.

Another survey showed that in attempt to catch up with the U.S. Federal Reserve, the BoJ will boost its monetary base by more than 50% by the end of the next year. By the end of 2015 the amount of currency in circulation will reach 340 trillion yen, up from 220 yen last month. It means such a measure will close a gap with the $3.91 trillion in the world’s largest economy. Moreover, it was confirmed by the RBA’s Stevens, who expects the BoJ will outpace the Fed soon.

AUD

"This suggests the peak in the unemployment rate may be close, although the rate of improvement in job advertising does not suggest a rapid fall in the unemployment rate”

-Ivan Colhoun, ANZ chief economist

Australian labour market is this week’s one of the main highlights, as policymakers have claimed the labour market is one the biggest headaches, hence, any improvement or deterioration will have a strong impact on the Aussie. The jobless rate is projected to remain unchanged at 6.0%, however, the economy is likely to add less jobs than it managed in February. The first report from the labour market looks promising, as the number of job advertisements climbed for a second straight month in March. The ANZ reported a 1.4% lead in the posted employment opportunities in the nation’s capital cities. The figure follows February’s positively revised 4.7% jump. Both internet and newspapers ads posted solid gains, advancing 1.3% and 4.5% respectively. The company has already claimed the labour market is finally strengthening. A pickup in the labour-intensive interest rates sensitive sectors like retail or construction, the number of jobs is likely to rise further.

In contrast, the central bank sees a further deterioration in the unemployment as demand for labour remain sluggish amidst the massive slowdown in the key mining sector. Nonetheless, the labour market can be approaching its turning point and the unemployment can reach its peak, as other fundamentals are pointing at broadening economic recovery, suggesting companies will be more willing to hire staff.